Friday, February 27, 2009


Intrade is now predicting 10% unemployment by year-end...

Actually, those intrade contracts at unemployment above 8% at .75 look pretty attractive...

A month back I was bitching about how pathetically inadequate the stimulus was. Now it really appears to have been too small... The only positive statistical release I can think of is the Janauary CPI.

My thoughts on the budget balancing thing: Tax increases next year? Let's take care of the recession first guys... We don't know there's going to be a recovery by next year. The Obama team is acting like their miniscule stimulus package and doing nothing on banks is going to deliver us from evil.

I'm not saying we've got Armageddon on our hands, but it does seem a bit optimistic to just think that things will turn around on their own. And it still seems to me that all economists, but especially the President's economists, are way too optimistic.

Here's the NYT: "The country’s gross domestic product fell at an annualized rate 6.2 percent in the last quarter of 2008, the steepest decline since the 1982 recession. Economists are expecting a similar drop in the first quarter of 2009." Um, I'm no forecaster, but job-loss rates were higher in the first six weeks of 2009 than for Q4 2008, so why should we not expect worse GDP numbers too? And not just job-loss rates, housing prices, the stock market, and consumer confidence have all gone south since Q4 as well...

Here's the money quote:
The budget projected economic conditions that critics had called overly optimistic, including an estimate that G.D.P. would shrink 1.2 percent in 2009.
The administration thinks GDP will shrink only 1.2% in 2009! That's preposterous... It's just as likely that GDP will shrink by 11.2%... I'm not saying that's the most likely, but you've gotta believe if we have -8% for Q1, -6% on the year is entirely plausible, if not optimistic...

Thursday, February 26, 2009

haven't posted in awhile...

W/ apologies... i had to grade last weekend, and i still *still* haven't finished the paper I'm working on... It's probably never a good idea for an untenured academic to spend too much time blogging...

Words of the Day...

Torschlusspanik vs. Torschusspanik

The first is the type of panic you do before a door is about to close -- you get the puck out! The 2nd is the type of panic you do when you've been passed the ball right in front of the goal and are expected to score!

Torschlusspanik, of course, is one of the explanations for what happens in a bubble... Yeah, some people know there is a bubble, but they can't resist those big returns, so they try to stay in until things start to turn south. And then when things start to turn, and the market begins to head south -- Bam! Torschlusspanik! Everyone tries to get out before the door closes...

Among the crazy things conservatives are now arguing, interestingly, is that
there is no such thing as bubbles.
That, since humans are rational, bull-markets (not bubbles, for there are none) are always warranted by their fundamentals. Even the "Tulip Mania", some conservatives argue, was completely rational responses to the fundamentals of supply and demand. Of course, this is all utter crap, but nevertheless, I'm always amazed at how many otherwise-intelligent, democratic-leaning economists get taken in by this shit... And is anyone else just getting sick of reading conservative economists write anything? It seems like they've just totally gone off the deep end...

Friday, February 20, 2009

Obama and the Goat Devil

Maureen Dowd, who is normally not worth reading, was this week.

I had always wondered if and when George W. Bush's relationship with Cheney would sour, now we have some evidence. So, I've gotta ask, how long before it will be before Obama loses faith in Summers? I think, on one hand, Obama's a smart guy, so it should be sooner rather than later. On the other, Summers is not nearly as crazy as Cheney, implying it could be later rather than sooner. What the President needs is clear, incontrovertible evidence that Summers has been wrong on something before the aura of the "brilliant" Harvard John Bates Clark medalist raised by Nobel Prize winners starts to take a hit.

Spending cuts in California and New York thanks to the stimulus package which was too small could be one data point where the evidence conflicts with what Summers likely told Obama when the size of the stimulus package was announced. Aside from the large size of the housing bill and the hint that there might be more stimulus to come, w/ today's announcement on the banks and the revelation that Summers will control the auto bailout, his role appears undiminished.


Well, I guess the die has been cast on the nationalization thing... In order to assuage the markets, Treasury has said: "This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government".

Doesn't that mean it can't happen now? Sure, stock indices rebounded to be only down about 1% on the day (bank of America up 25% after the announcement!), and the market's now only down about 20% since the (small) size of the stimulus plan was announced, but I can't help but think the result of this isn't going to be a whole lot of muddling... And who cares if the stock prices of insolvent banks take a hit?

The crazy thing about how much the stock market was down earlier today (down down 200+) is that January's core CPI was actually up .2%, which was an undeniably good sign. This week we had the housing bill, the stimulus signing, an announcement that another stimulus is on the way, promises not to nationalize the banks, and yet, how did the market do on the week? off 5-6%?

Thursday, February 19, 2009

Deflation at Bay?

The Producer Price Index, after falling in Nov. & Dec., was actually up in January... Certainly, having the core rate up .4% is good news... That's basically perfectly normal, and a good sign for the economy. The intermediate goods index continued to deflate, by 1.1% however, so we're not really out of the deflation woods yet...

Tomorrow, we'll get the CPI

Wednesday, February 18, 2009


After yesterday's 4.5% spill in the S&P, the S&P was down again today! No dead-cat bounce... (At least at the moment...)

This is crazy considering 1)Yesterday Obama signed the stimulus, 2)Put out a feeler that we may need another, and 3)Announced a much larger housing bill than most people imagined.

I see 2) and 3) as very positive signs that Obama gets it. Particularly the Housing bill strikes me as something that's not the least bit Summers-esque... As liberal as I am, I'm not a huge fan of large new housing subsidies, so I can't believe Summers wanted this... This is pure speculation, of course, but I kind of wonder if the the 20,000 job cuts, the $14 billion tax increase, and the $15 billion cut in spending in California wasn't one bit of information (along with the plunging market) that is hard to reconcile with the belief that Obama's stimulus is large enough to "create 3.6 million jobs".

I also saw this: "the Fed’s Open Market Committee said it expected that the economy would contract by 0.5 percent to 1.3 percent this year, that unemployment would rise to 8.5 to 8.8 percent and that inflation would remain under greater pressure."

Those numbers are, of course, pure fantasy. I'll bet anyone the economy will contract by more than 1.3 percent, and that the unemployment will be higher than 8.8%. I'd be willing to give out 10:1 odds unemployment is higher than 8.5% at the end of the year... I guess the Fed can't say things are going to fall off a cliff, but it also loses credibility...

Meghan McArdle is confused...

Here she says that "we just don't know" that WWII ended the Great Depression. Sorry, but yes we do. Of course, I would date the end of the Great Depression to 1939, when war spending in Europe increased demand for US goods. Just b/c it was done in Europe does not mean it wasn't done by government. This, combined with what FDR was already doing, kicked the economy into high gear. Once the US govt's war spending started to increase, the first few years of the war were some of the fastest US growth on record (save FDR's first couple years in office)...

Cato Ad

The Cato Ad was the ad by a pack of utterly confused, raving mad Neo-Hooverite lunatics opposed to the stimulus (despite its small size; they thought it should be smaller...). This part of the ad caught my eye:
More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s.

This is completely accurate of course. More spending by Roosevelt helped the economy a ton, and led to 8% growth, but it didn't quite finish the job (partly b/c FDR cut back spending and raised taxes to try to balance the budget). Roosevelt did, however, end the Great Depression by spending lots of money in the 1940s. Key word being 1940s rather than the 1930s. Japan also really never tried any large fiscal stimulus.

Chicago economist says: Unemployed? You must be lazy or have bad morals...

Here's a working paper from a real live U Chicago economist, and its every bit as *good* as you'd expect. The line: The downturn is not caused by the burst of the housing bubble, the tightening of the credit market, the reduction in consumer durables caused by the market crash, but rather, the downturn is the result of laziness. I.e., people decide not to work b/c they'll get help w/ their house foreclosure! Lol... It's just too much. Check it out...

For the record, I remember when Harold Uhlig came out in the past year to give a talk on capital gains taxes. His conclusion was that the US, on capital gains taxes, was dangerously close to the flat area of the laffer curve -- and predicted, that even if they US raised cap gains taxes, it could only increase revenue 5-6%! I asked, how could that be, cap gains taxes are 0 for someone in my bracket, if i want to save, i've got no choice but to pay cap gains... Lol-- he was so ignorant, he didn't even have any idea what the cap gains rates in the US were! He'd just done a bunch of math and plugged in some absurdly high "average business taxes" number he got from the Heritage foundation...

One problem with both models is that they assumed everyone was the same. This is a standard assumption, of course, in macro models, but most results are sensitive to it.

I spent a full 10 minutes on Mulligan's paper, after the Ambrosini critique recommended it, and here was my take:

Real wages and productivity often rise in recessions when non-essential people are laid off. Say you’re the president of a two person firm. You’re firm makes $100k. Sales go down $10K due to recession, so you lay off your secretary/personal asssistant. Total hours worked at your firm dropped, and although sales are way down, productivity is up!

Replace labor with capital, redo the same calculations, and you could conclude that machines have decided to take more vacation time…

Monday, February 16, 2009

Poor Guy

Poor guy.

I've certainly been jet-lagged before, and when I am, and when I feel like going to sleep, even one red bull won't do the trick. Usually I drink 2-3, and make sure that I'm doing something active, or else I'll fall asleep...

Apparently, he readily admitted to having had some wine beforehand (wine does not equal red bull), so maybe he is to blame. Probably Japanese are a little bit edgy after the -13% 4th quarter growth. Any time a major official embarrasses Japan though, they'll get fired. So call it a two-fer.

Economist Blog Confusion

The Economist Blog looks at a few key economic indicators in the early 1980s vs. today, and concludes "things were a lot worse then".

Unfortunately, it's not really the case.

Given that, in a liquidity trap, deflation is the bigger threat, we'd clearly be better off if we had 14% inflation right now than we are w/ zero inflation/deflation. Similarly, if the prime rate and the mortgage rates were really high, we could be certain that lowering them would help the economy, and so we would know that things will not continue to get much worse.

Also, the real mortgage rate appears to be higher now than in 1981...

So, the only thing that really is worse in the above is the jobless rate. I notice that they cherry-picked the inflation rate from earlier in the recession cycle, and the jobless rate is taken from later in the cycle... Since unemployment usually still rises even after economic growth is restored, this is slightly misleading. Had they taken both numbers from 1980, the unemployment would have been less. had they taken both from 1982, the inflation rate would have been lower... Most economists expect the unemployment rate to increase for probably the next 12-18 months at least. It's better to compare how much the unemployment rate has increased since the beginning of each recession... And if we do, the answer is: If February is as bad as Nov.-Jan. as far as job losses go, this recession will have resulted in a bigger increase over the same period of time.

The total unemployment rate is also important, of course. My guess is that we could be at 10%-plus by the end of this year and could give 10.8% a run for its money. It's still too early to say.

Hail Greg Clark!

See this

Here's the money quote:
As chair of my department I tried to arrange a public debate between one of the signatories and a proponent of fiscal stimulus -- thinking that would be a timely and lively session. But the signatory, a fully accredited university macroeconomist, declined the opportunity for public defense of his position on the grounds that "all I know on this issue I got from Greg Mankiw's blog -- I really am not equipped to debate this with anyone."

Here's the list of shame:

Good News for Detroit: Summers N Charge of Bailout!

Summers and Geithner are in charge of the auto bailout means, of course, that Summers is in charge of the auto bailout. Yes, as Naked Capitalism says, it looks like they are executing a land grab. Geithner is over his head of course, but as Treasury Secretary, he's got two roles, one he's done and will do brilliantly, the other not-so-much. The role he's played brilliantly, of course, is in letting boss Larry Summers walk all over him, which he'll continue to do. He's been shaky so far in being Larry's public face, and wasn't chosen for this quality so much, more for his weak, impish qualities.

Knowing Larry, it's not hard to imagine what he thinks -- that governments should not pick winners & let the big 3 go thru chapter 11. Actually, in this case, this is also what Joseph Stiglitz thinks, so Summers ideology may in fact drive him in the right direction on the auto companies.

Still, it's depressing to see Larry Summers appropriate even more power for himself.

Sunday, February 15, 2009

Immortalizing Summers Hero Milton Friedman

Brad DeLong has a post up quoting Republicans predicting doom after the Clinton 1993 tax increase.

Larry Summers wrote, upon Milton Friedman's death, that he was drawn to Friedman b/c Friedman was a prophet, successfully predicting 1970s inflation dynamics. Here's what the ever-prophetic Milton Friedman thought the Bush tax increases alone in the early 90s "comdemned us us to a very slow and erratic recovery from a mild recession, and, very probably, promises a relatively slow 1990s, almost regardless of what the Clinton administration does."

He really could not have been more wrong about that, now could he?

Saturday, February 14, 2009

From the department of WTF? Should We Be Worried About Too Much Debt?

Harvard's Jeff Frankel asks, "Is $800 billion too big or too small?" and answers "Yes". In other words, he thinks it's too big and too small. Too small in the sense that it's not big enough to fill the output gap, too big in the sense it adds too much to the deficit.

A couple of points: Frankel uses a smaller output gap that I think is reasonable to predict, and he neglects considering state and local budget cuts, so while he agrees that $800 billion is too little to plug the output gap, he massively understates the extent to which the Obama stimulus is insufficient. More importantly, if what he is saying is correct, and investors are starting to get weary about holding more greenbacks, then we should see the dollar sliding against currencies, such as the Euro, who have smaller stimulus packages. Indeed, I believe this was Summers' reasoning.

But check this out:

The dollar has actually increased substantially vs. the Euro! Now, it only takes $1.28 to buy one Euro, vs. $1.56 last summer, and $1.36 early last December. It doesn't seem to be taking much of a hit. And, last week, the dollar was unchanged vs. the yen, and on Friday, when the stimulus passed the Senate, the dollar actually rose against the yen. Indeed, even though the housing crisis and the banking crisis originated in the US, the dollar has strengthened against virtually every other currency since the crisis started. In turn, this has hurt the competitiveness of US producers and manufacturers, and is part of why we are bleeding jobs.

Let's think about it: if you were Toyota, and you were trying to decide which factory to close, would you close the factory in Canada, when the Canadian dollar has just depreciated 20% vs. the US dollar, cheapening labor costs? Or would you close your Mexican plant, given that the Mexican Peso has depreciated 40% vs. dollar, reducing labor costs there? (I'm not sure Toyota is even in Mexico, but several automakers are there, and they have to decide the same thing.) My bet is that you would close your American factory, since wages haven't fallen nearly as much as the dollar has appreciated.

So, on one hand, given the strengthening dollar, Frenkel's worry about debt appears unfounded. Secondly, Frenkel is wrong that if the dollar did weaken over concerns about the debt, that the resulting increase in competitiveness would somehow be a bad thing. Perhaps Frenkel is correct that if the stimulus had been on the order of $1.5 trillion, which is twice as big as it actually was and is roughly what I would have proposed, it would be better to include some future tax increases on the rich in the proposal, just to allay these long-term debt fears.

Still, I gotta ask: What's the Matter with Harvard Econ? Between Summers, Feldstein, Barro, Mankiw, Shleifer, and Frenkel (plus Baldwin), Harvard Econ looks like a nut-house. Rodrik has not impressed as of late either. Why does it seem like they've all got shit for brains? (Hoping to get someone from the H to take the bait and respond here...)

Finally, a Submission!

Yes, I've finally submitted the paper I've been working on!

No, unfortunately, not the Econometrica submission on the theoretical foundations of gravity equations I've been working on, but an Op-Ed urging our President to rid himself of you-know-who.

I kind of wonder whether I just wasted half a day... at least its off my chest now...

CBO projects what?

Click on the data for the projections as of December 12th 2008...

They projected an average of 8.3% unemployment for 2009, and 9.0% for 2010, reflecting the idea that even if the economy gets better, unemployment will not recover until next year. I think all economists would agree that we will not see month-on-month employment gains this year. It's just not in the cards. It also seems clear we'll hit 8.3% unemployment sometime in about 4-6 weeks, with additional increases in the unemployment rate for each of the following nine months.

The CBOs most current estimates are already a straight-up joke.

Escaping the Presidential Bubble...

I was just thinking. Imagine you are Barack Obama. Larry Summers is the economist you respect most, and he's telling you that the stimulus is large enough. Pitched against him are many conservatives whining about how the stimulus is so large it's going to bankrupt America, and that what we really need is a large permanent tax cut. So then, Barack talks to the very well-respected economists at the CBO, who say, that if the stimulus goes well, we'll see a dramatic reduction in unemployment by year's end of just 7.7% (a reduction, that is, over where we'll be in two months when the stimulus spending starts), Elmendorf forecasts, under the rosy scenario, and, if not, if the stimulus goes poorly, we'll still only be at 8.5%, just a touch above where we are now. Elmendorf predicts a "A marked contraction in the U.S. economy in calendar year 2009, with real (inflation-adjusted) gross domestic product (GDP) falling by 2.2 percent, a steep decline from a historical perspective." The thing is, the economy will drop at 5% in quarter one, that much looks clear. The stimulus spending in the six months thereafter comes only to $188 billion, or about 2.5% of GDP. So, let's assume that GDP contracts at only 2.5%, and then, magically, stages a recovery in quarter 4 to have flat GDP growth. This strikes me as an utterly fanciful scenario, and yet it yields a reduction in GDP for the year of 2.5%, higher than the CBOs prediction of 2.2%.

The problem is that, with monetary policy at a zero lower bound, any deflation we experience now will only increase the real interest rate, which should reduce economic activity. The CBO seems to believe that things will just magically turn around. They haven't said where the supposed recovery is going to come from. It looks like we've put all our chips into nonstandard monetary policy suddenly roaring to life and working, even though it has not been effective so far.

If Obama wants to hear an alternative to this rosy, magical recovery scenario, he basically has to read Krugman's blog, talk to stiglitz on the phone, or talk to Biden's economist Jared Bernstein, who has a much lower profile than Summers, Geithner, Orszag, or Romer. Point is, Obama can't exactly pick up the NYT and WaPo and find people blasting his stimulus as irresponsibly small. Criticism is pretty much limited to a few liberal cranks. (Although, with the bank bailout, there are no shortage of critics...)

Let's envision a disaster scenario. Last quarter, excluding the rise in inventories (which was an ominous sign), GDP lost 5.1%. Let's say things continue to get worse. Why might they get worse? Well, the labor market did shed 600,000 jobs in January, vs. an average of -520,000 in Q4 2008. The rise in inventories tells me that firms should want to cut back production even more, so they can reduce their costly inventory. There are still problems in the credit market, the banking crisis hasn't been sorted out yet, and the rise in unemployment means that consumer confidence should continue to be bad. So let's say GDP drops 6% in Q1 2009, which does not seem unreasonable given the January job loss numbers. Now let's say there is an increased crisis of confidence, consumers pull back even more than they are, and so too does state government spending (who's hands are often tied by balanced budget amendments), and so let's use a baseline of -7% for Q2 and Q3 of 2009, which doesn't seem too unreasonable. Why should we assume that, absent any government intervention, things won't just keep getting worse? In this case, the Obama stimulus gets us back to just -4.5%, and perhaps just -4% for Q4.

Here's the thing: If the economy does that poorly, state and local governments are going to be that much more in the hole, and will have to pull back even more in 2010. Previous estimates were that state governments forecasted revenue shortfalls of $350 billion thru 2011, but those estimates were almost certainly based on, at worst, the CBOs rosy predictions of -2.2% GDP reductions. With -4% GDP, those state government shortfalls could be more like $500 billion over three years, which has the effect of eating away at even more of the meat of the Obama stimulus plan. If local shortfalls (including cities but not states) come to $150 billion over the next three years, which does not seem unreasonable, then practically all of the Obama stimulus will be gobbled up by actions at the state and local level.

So, the question is, how long until Obama Stimulus II?

And, once the specter of Obama Stimulus II comes out, how many milliseconds will it take Congressional Republicans to jeer that, if the stimulus didn't work the first time, why on Earth would it work a second time? How long will it take them to deplore throwing good money after bad?

In this morning's WSJ...

Chris Dodd sticks a last minute provision in the bill limiting exec pay at firms who are getting public money... The provision would effectively limit the CEOs pay at Bank of America, for example, to $2.25 million. Larry Summers called Dodd to try to get him to take it out...

Presumably, how it worked was this: CITI called larry summers, and told him they wouldn't give him any more freebies on their corporate Jet unless he called Dodd to make sure Exec pay isn't limited to a humuliating coupla' mill. The Cossacks work for the czar, after all...

Friday, February 13, 2009

In This Week's Mail...

The aforementioned The Age of Roosevelt, by Arthur Schlesinger, Jr., vol. 1 (1957) and 2 (1958). --Incredibly interesting so far! It seems FDR, when first elected, was under the spell of his Treasury Secretary, who believed that the government had a moral obligation to balance the budget, and that if it did, everything would be well again...

Charles Stross's The Hidden Family -- Development novel and historical/sci-fi classic all rolled into one... Hard to put down so far.

Staffan Burenstam Linder's 1961 An Essay on Trade and Transportation. Ohlin's student (of the infamous Heckscher-Ohlin Theorem, which posits that factor endowments determine trade flows) Linder's hypothesis, a famous conjecture in trade theory, is that nations trade based on their demand structures, since manufactures are specialized, subject to increasing returns, and require learning-by-doing...

Milton Friedman''s Money Mischief, and his short essay "Why Government is the Problem". --The first 15 pages of Money Mischief have been interesting so far. I'm embarrassed to say that I had never read Milton Friedman (I know, I know, I should start with his Monetary History, but that was $40+ on Amazon, and I've gotta pay rent...). Since Milton Friedman was Larry Summers idol, and Brad DeLong often blogs about him as having been a genius, I've tried to read him with an open mind.

Most of his arguments do not really ring true for me. He lists nine major areas where he thinks government has made a mess... One of them is airports. Airports? He says the "bottleneck" is in air control facilities. I would imagine this was a 60s, 70s, and 80s thing. Yes, I had a flight delayed for a day when I flew home for Christmas, but it was because my layover was in Chicago, which had a blizzard. I fly frequently, I definitely do not usually have delays. Never had my luggage lost. Most airports appear almost excessively nice to me... This is one of his nine key areas where government has failed? Really? Another is homelessness... I just can't get my head around why it's government which has caused homelessness and not capitalism. Yes, ok, rent control is bad, but, please, there are also housing projects, welfare, social security, and food stamps, all goverment programs and all of which, if ended, there would be much, much more homelessness.

Another one is the "Financial System". Please. Not a good time for that Milton. Government can only be seen to have "caused" the current crisis in that it failed to intervene in the free market.

The next example of government failure was "Highway Congestion". Here, I tend to agree with him that government action has been problematic. Rush hour traffic and gasoline should both almost certainly be taxed, with the proceeds to go to expanding the highway and mass transit. I think where i would differ from Friedman on this, though, is that I think government is the only solution to the traffic problem.

On rent control and local building code requirements, though, I agree that there's too much regulation at the local level. This regulation is often designed to protect established interests from new competition...

Another of his big areas where government has failed is in "lawlessness and crime". Why? He says, if we would just legalize drugs, it would go a long way to stop gang violence. Here, too, I'm somewhat in agreement. I would like to see some drugs legalized, but only so they could be taxed heavily and regulated.

Friedman also argues that government has caused a decline in family values... Please. I'd pick apart his argument, but he doesn't really make any argument. This section is just really vague, and he cites Charles Murray's book as evidence that "these social problems owe a great deal to mistaken and misdirected governmental policies."

So, this Friedman essay reads like utter garbage to me so far. His one saving grace may be that this was published in 1993. I just checked his birth date -- 1912, which makes him 81 at the time. Given his age, it's actually quite impressive! It's never fair to judge an author by anything he wrote after the age of 60... I'll have to get his earlier books...

This Train Has Already Left the Station, but...

Don't know how I missed this petition to say "No" to Larry Summers...

God bless America, and God bless The Nation!

Thursday, February 12, 2009

Whoah... Jeff Frankel's got a blog!

I had no idea. I know him from his currency union papers and his presentation on them at the AEA. I (vehemently!) disagree with the conclusions of his papers -- that currency unions increase trade a lot (it's really just a simple endogeneity issue, and not that difficult to get around); nevertheless, his blog looks interesting, and he certainly is not the first mainstream economist to be fooled by endogeneity...

A Stimulus Idea for America...

How long before Summers gets the bright idea that we can rejuvenate our economy by having Europe dump its toxic waste in the US? The logic is impeccable, and its time to own up to that... A state like Mississippi has gotta be vastly underpolluted given its per capita gdp...

A Question to Ponder

Maybe it's time to ask whether Larry Summers lacks the "intrinsic aptitude" to formulate coherent economic policy?

Florida Has Already Cut...

Florida's state and local governments stand to get up to $13.7 billion in federal stimulus money spread over three budget years, including the current one that runs through June 30.

This year's budget, though, may drop into the red by more than $300 million, Alexander said. He also expects a $5 billion budget gap next year.

"No single solution will solve that level of deficit," Alexander said. "There is little double that further budget reductions will be necessary."

Lawmakers cut current-year spending by more than $1 billion as part of a $2.5 billion deficit-elimination package Gov. Charlie Crist signed into law after a special legislative session last month. The plan also tapped reserves, raided trust funds, shifted dollars around within the budget and raised traffic fines.

Additional adjustments probably likely will be required during the regular session to avoid ending the budget year with a constitutionally prohibited deficit, Alexander said.

Time for Larry Summers to spend more time with his family... I don't blame the Ben Nelson's of the world for this -- of course moderates will have wanted to cut the size of the package to appear moderate -- the problem was that the initial size of the stimulus was way too small. Obama should have made it $1.3 trillion, and then let the moderates shrink it...

Fire Larry Summers Now!

Here's the latest on the state of California's budget:
The plan relies almost equally on spending cuts and tax increases to close the deficit — $15.1 billion in cuts and $14.3 billion in new revenue — as well as $10.9 billion in borrowing. Funding for schools and community colleges would drop by $8.6 billion, by far the largest single spending reduction. Cost-of-living increases would be denied for welfare recipients and for the aged, blind and disabled; those savings, along with other cuts, would be more than $1 billion. And spending on state universities would be pared by $890 million.

The proposal would require state employees to continue to take off two Fridays a month without pay through summer 2010, and it would eliminate two of 14 paid state holidays. But the mass layoffs Schwarzenegger threatened this week would be avoided.

Voters also will be asked to approve borrowing $5 billion against future lottery revenue — an unpopular idea, polling shows. The state intends as well to take out a $5.5 billion loan, an uncertain prospect given the state of the credit markets.

If California receives enough money from the federal stimulus package approved Wednesday, the state would forgo the $5.5 billion loan. Officials also expect the federal money to alleviate the need for roughly $1 billion in proposed spending cuts and $1.8 billion in tax increases.

This really makes it sound like the Obama stimulus is chickenfeed. At a bare minimum, the Obama Stimulus should reverse all state spending cuts and tax increases. This effectively shrinks the size of Obama's stimulus over the next 18 months by nearly 5%. And California is not alone.

FDR first to take oath...

Just picked up Arthur M. Schlesinger, Jr.'s FDR biography, and lo-and-behold, he starts with FDR's swearing in. Apparently, before FDR, President's would just say "I do", but FDR memorized it ahead of time and was thus the first to repeat the entire oath instead... (makes Obama look overly cautious for doing it twice...)

As for FDR, the Great Depression, and being overly cautious, I think a consensus has developed among historians and economists that the reason the New Deal did not completely cure the Great Depression was that FDR was overly cautious. Of course, he tried many bold things, but he would always take care not to run up the deficit too much, and would also include tax increases. So while the economy did much better under FDR than under Hoover, FDR never quite solved the crisis because he was just too damned cautious.

Is history repeating itself?

Monetary vs. Fiscal Policy.

As I posted a few days back, the recent increase in the TIPS spread implies that expectations of future inflation are increasing. Will over at the Ambrosini critique takes this as clear evidence that the Fed's monetary policy is finally working. Maybe he's right, but that wouldn't be the first thing that comes to my mind. I'm biased of course, b/c I am for the stimulus, while Will is not, but usually, when any government announces a large new spending package, the yields on its long-term bonds increase. That's totally standard. Remember what happened to long-term yields when Clinton passed his balanced budget? They dove. Some of the increase in the TIPS spread has just *gotta* be the stimulus.

Of course, most conservatives believe the stimulus was much too large and too heavily weighted toward spending. I think it was too small, and too heavily weighted toward tax cuts. The increase in the TIPS indicates that the probability that I'm wrong -- that the stimulus is enough -- just went up. (Although I think it's still small.)

If Will is right, and the Fed is behind the increase in the TIPS spread, then we should see a nice little pop in the January CPI when the figures are released next week. However, I'm going to go out on a limb and predict that we won't see much of an increase in the core CPI. (Of course, I'll eat my shirt if I'm wrong...) If it's flat, I think we can say that the Fed is basically fighting deflation to a standstill (an achievement). If it falls at all, then monetary policy is, for all intents and purposes, broken. Why? Well, we've had deflation in the total CPI for four months now, and basically a flat CPI, and massive increase in unemployment. By mid December, if not well before, it should have been clear as crystal to the Fed that it shouldn't leave any arrows in its quiver. Any additional non-standard policy idea the Fed has had, it should have started testing them well before January... The only other conclusion is that the Fed has been overly cautious and is thus at fault...

Liberal Economists: A Very Short Bench

Matt Yglesias tells us that: "MediaMatters takes a look and finds that only five percent of guests brought on cable to talk about the stimulus package were economists."

Given that, I wonder what percent are liberal economists? My guess is only about one in five, for there just aren't that many of us. Which means, if you're liberal, and thinking about future career choices, why not economics?

Can Economists Forecast?

The public thinks what economists do is forecast. It's not. I'll confess, I know nothing about forecasting.

Intrade tells us to expect unemployment over 9% by years end (earlier, if memory serves, they had it at 9.25%...)

Via Greg Mankiw, Ray Fair , an Macroeconomist at Yale, predicts unemployment will top out at 8.8%. The only problem is that he started with a baseline of 6.9% in quarter 4 of 2008 and has 7.8% at the end of quarter 1 in 2009. That's already a pretty big gap with reality, enough of a gap that I'm be tempted to throw the rest of his results in the trash. Assuming he's off on today's numbers by .5%, and that his errors don't increase, unemployment should top out at 9.3%. (Though given that his current error is so large, it doesn't inspire confidence.)

Meanwhile, the CBO predicts Dec. 2009 inflation at 9.0, and 8.5 as a low estimate with the Obama stimulus, and 7.7 as the "high estimate".

The trouble is, there's nothing stimulating the economy at the moment. The stock market is in free-fall. 600,000 jobs lost last month, and another million expected to be lost in the next few months means that consumer spending is continuing to fall. This, in turn, should mean more job losses. Best case scenario, the unemployment rate is at 8.1% six weeks from now (will probably be more like 8.3%). In the past few recessions, of course, the end of the recession comes well before employment starts to recover. So I don't get why anyone thinks we'll have such a strong recovery by the end of this year that the unemployment rate could fall. Again, best-case-scenario looks like we're in a position at the end of the year in which employment is month-on-month flat, but GDP has started to increase and confidence is restored. But that means the unemployment rate won't be any better than 8.1%, and that's if everything goes unbelievably well. 9% unemployment at year end seems to me to be overly optimistic, given the stimulus, and given that GDP starts to recover.

I'm curious, what do other people think?

Wednesday, February 11, 2009

TIPS Spread Increasing

The whole threat now is deflation... This chart tells us that future inflation expectations have increased... That's a great sign!

To the Economist Blog: I Give You The One-Finger Salute!

Expanding on the Becker-Murphy WSJ editorial, the Economist blog writes:
Stimulus spending in health care will simply move employed workers from the private sector to the public sector.

Oh, is that what giving laid off workers health care will do? Merely move resources from one use to another? Is there really no benefit to expanding health care coverage?

Here's a personal story about my cousin, who had two little girls: One day he was carrying boxes across an icy parking lot at work (Ohio in the winter...) Slipped. Fell. Had chronic back problems, but his employer wouldn't pay his medical bills. Tried to sue. anyway, he put on weight and was immobile for awhile. Which led to being unemployed for awhile... Which led to depression. Eventually, the depression got to him, and he decided enough was enough. He's no longer with us.

What would have become of my cousin if he'd have been insured? Admittedly, I don't know the answer to that. Whether he could have been completely cured or not (and perhaps not), it certainly would have made his life much easier. Now we've got the Economist blog telling us that insuring my cousin would have had "no net gain". To which I say Eff You! That's just insultingly let-them-eat-cake ignorant.

Tuesday, February 10, 2009

Stiglitz on Bank Bailout

Why oh Why couldn't we have had Joseph Stiglitz running economic policy in the Obama administration?

One thing that strikes me about the interview was that Stiglitz reiterated his view that we should let the automakers fail. This is just one case among many where it is clear that Stiglitz, a liberal, bucks conventional liberal wisdom. Is he right? I'm not sure, but it's always refreshing to hear someone speak who you don't know what he's going to say ahead of time...

I first became a big fan when I read a comment dismissing Alwyn Young's work on productivity growth in the Asian NICs as trash. As it turns out, Alwyn's Young "research" on the Asian NICs was utter trash, but most economists, even today, take it as gospel. Part of the reason is that Paul Krugman published an article in Foreign Affairs hyping the research, not realizing he was shoveling shit...

Summers on Fox News Sunday

Transcript is here.

Actually, I think he did well. Although I haven't seen Larry on one of the Sunday shows yet, I think he could be very good in this capacity... in other words, he could be helpful for the administration to be the conservative, old white male economist face defending populist left-liberal policies on television.

He just shouldn't be involved in crafting policy...

I remember reading Dallek's JFK biography, and one of the things that struck everyone was that JFK had four different sets of advisers for every issue. What Obama really needs is three or four parallel teams of economists, working to craft their own ideas on the bank bailout, and on the stimulus, separately, and then he needs to be able to compare these independently and fully-thought-out proposals separately. Volcker has no team of economists under him, and most of the rest of the economists in the administration are close Summers confidants. This is a problem...

Summers on Fox News Sunday

One hand washes the other, eh Larry?

From the Boston Herald:
Larry Summers’ summer ride on a posh corporate jet owned by Citigroup shows how both Democrats and Republicans had become cozy with America’s once-powerful financial-sector elites before last year’s Wall Street meltdown, observers say.

Phineas Baxandall, a senior analyst with the U.S. Public Interest Research Group, said it was “disappointing to hear” that Summers, as an economic adviser to Democratic presidential candidate Barack Obama, hitched a freebie lift on a Citigroup jet last August while attending the Democratic National Convention in Denver.

While saying he didn’t know details about Summers’ freebie ride, Phineas said Democrats and Republicans became too close to those in the financial industry in past years, creating “potential for undo influence” among bankers over current and future policies.

The White House has downplayed Summers’ Citi trip last summer, saying he was a private citizen at the time - though he later became Obama’s top economic adviser.

Mary Boyle, a spokeswoman for Common Cause, blamed political campaign donations and corporate lobbying for policymakers not cracking down on the financial sector.

What's the big deal? Bankers scratch uncle Larry's back, he scratches theirs...

Hail Josh Marshall!

As always, Josh Marshall is astute! He writes:

Cry Me a MF'in River

Chafing under new scrutiny and limits on executive paychecks, many big banks are deciding that they've had quite enough of Uncle Sam and want to give the bailout money back as soon as possible. You get the sense we shouldn't have treated them so badly because if we hadn't they wouldn't be forcing us to take our money back. That's the report here from the New York Times.

The interesting thing though, when you read down into the article is that they don't like the scrutiny and interference and they want to pay the money back to get us off their backs. Only, it's going to be pretty hard to pay the money back because no one else is lending money right now, and certainly no one on as generous terms as the US government is. And if they paid back the money a lot of them might well go out of business.

In other words, they'd love to pay it back, especially if they had the money to pay it back, which they don't. So presumably we won't be hearing any more about this but the whining.

Things are tough all over.

The two named institutions are Goldman Sachs and Morgan Stanley, which, at least as far as I understand these things, are probably the healthiest of the big banks, though it's a pretty low bar. Goldman CFO David Viniar tells the Times: "We just think that operating our business without the government capital would be an easier thing to do. We'd be under less scrutiny, and under less pressure. Not that we'd be out of the public eye; we're still going to be in the public eye."

Now, let's assume for the moment that Goldman and Morgan Stanley really don't need government TARP money or any other direct injection of taxpayer funds. This still doesn't account for all the indirect ways most if not all of these companies are only afloat today because of government rescue and taxpayer dollars. Behind the scenes for something like a year, the Fed and the Treasury have been doing all sorts of guaranteeing debt offerings, loaning money, doing all sorts of things to keep these outfits afloat. That's all in addition to the TARP money.

And take Goldman Sachs. You know that we've spent a hundred billion dollars of so bailing out AIG. Where do you think that $100 billion went? A lot went to pay off various banks and other financial institutions that would have gotten clobbered if AIG went under.

According to this September 2008 article in the Times, an AIG collapse could have led to as much as $20 billion in loses for Goldman, which was AIG's largest trading partner. The simple truth is that none of these outfits can go it on their own. Most are already on their feet today because of government support. And others probably could not have survived without systemic support for the whole industry.

--Josh Marshall

Simon Johnson as blogger... pleasantly surprising!

Here he is, right on point, at tpm cafe:

Monday, February 9, 2009

Obama on TV

I just saw Obama's interview, or much of it, on CNN...

I'd have to say he was dynamite. I heard his approval rating on the stimulus package was already at about 2/3rds agree, I'm certain he'll get a nice bump from it. If only he didn't have Summers as his most influential adviser, I believe he could accomplish about anything...

The weakest point, I thought, was when he said something about how we have a $2 trillion dollar hole in demand between this year and next, so that's why we need an $800 billion dollar stimulus. Excuse me, Mr. President, but then why wouldn't we need a $2 trillion dollar stimulus? OK, ok, if we had a spending multiplier of 2, then perhaps it wouldn't be so bad... but since inaction on the federal level implies drastic tax increases and spending cuts at the state and local level, and since much of the plan consists of tax cuts, (w/ a multiplier of one or less), its hard to see why this plan isn't deeply inadequate.

TPM, e tu?

I love Have read it almost every day of my life since 2002, roughly...

But, now it looks like they are having MIT economist Simon Johnson on as a guest blogger...

That's too bad, because Simon Johnson is completely nuts. I saw him speak at the AEA conference in San Francisco this year (for the non-economists, the AEA is the biggest economic conference of the year). Johnson is a coauthor (or should I say accomplice?) or Daron Acemoglu, also at MIT. Both are lunatics.

Just to give a taste of their lunacy, in one paper "Reversal of Fortune" they try to explain the apparent paradox of why countries which were rich in 1500 are poor now, and countries that are rich now, were poor then (actually, part of the problem is that this is definitely not true -- Acemoglu, Johnson, and Robinson didn't understand the Malthusian model) -- the conclusion that they reach is that countries which are poor now could be much richer if only they had embraced colonization more!

Having said that, I don't see anything too crazy yet in his writings... Mostly sounds benign, and a touch boring so far...

The NYT turns into ridiculoustown, take II

Breaking News: The NYT gets played like a fiddle.

You really have to read between the lines whenever you pick up any newspaper, even the Times.

The first two paragraphs of the Times synopsis of today's announcement of TARP II:

The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.

In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.

In other words, what happened is that Summers knew this would be unpopular (particularly with liberals), and so he removed his fingerprints, so that Geithner gets stuck with the baggage. Of course, nothing in the Times story was false, exactly, but it is miraculous that Summers -- the decider -- was able to go unmentioned in the entire article.

Other than that, I'd say the new plan doesn't look like much of a plan, and looks bad. Looks like drift to me.

I didn't like this:

Finally, while the administration will urge banks to increase their lending, and possibly provide some incentives, it will not dictate to the banks how they should spend the billions of dollars in new money from the government.

Um. Why not? If taxpayer money is going into a bank bailout, we should get some ownership, yeah? And if we do, then we should be able to call some of the shots, including making banks lend a certain amount! Why not just say to someone like Bank of America, whose new lending is probably down something like 90%, year-on-year, you have to have new lending half of the amount in new lending you lent out last year? (I'm making up these numbers, of course, but why not do something like it? The Chinese are...)

Sunday, February 8, 2009

Rich on Summers

Hail Frank Rich!
Key players in the Obama economic team beyond Geithner are also tied to Rubin or Citigroup or both, from Larry Summers, the administration’s top economic adviser, to Gary Gensler, the newly named nominee to run the Commodity Futures Trading Commission and a Treasury undersecretary in the Clinton administration. Back then, Summers and Gensler joined hands with Phil Gramm to ward off regulation of the derivative markets that have since brought the banking system to ruin. We must take it on faith that they have subsequently had judgment transplants.

A welcome outlier to this club is Paul Volcker, the former Federal Reserve chairman chosen to direct Obama’s Economic Recovery Advisory Board. But Bloomberg reported last week that Summers is already freezing Volcker out of many of his deliberations on economic policy. This sounds like the arrogant Summers who was fired as president of Harvard, not the chastened new Summers advertised at the time of his appointment. A team of rivals is not his thing.

Rich then links to another article which talks about Summers role in ensuring that the derivative market didn't get regulated:
Odds are you've never heard of Gary Gensler, the man President Obama has nominated to run the Commodity Futures Trading Commission (CFTC). But it's slightly more likely you've heard of Brooksley Born, the woman who held that position under Clinton in the late 1990s. Amid the cascading financial crisis and cries of "Nobody could have predicted!" from many of those who were instrumental in bringing it about, Born has emerged as one of the rare voices that warned of the perils ahead. In 1997 she began to sound the alarm about the growth in the derivatives market, which, unlike traditional futures, were not traded on a regulated exchange. Born argued that derivatives should be brought under regulatory supervision, or they "could pose potentially serious dangers to our economy."

She proved prescient. These instruments, specifically credit default swaps, increased risk throughout the global financial system, eventually bringing down AIG, the world's largest insurance conglomerate. George Soros, economist Alan Blinder and many others now name the failure to regulate credit default swaps as one of the prime causes of the collapse.

But in 1998 powerful voices close to the Clinton administration--Robert Rubin, Larry Summers and Alan Greenspan--argued that the derivatives market was just fine. They had allies among the Wall Street banks who were making money hand over fist in the unregulated, over-the-counter market.

Summers really just keeps getting worse in my eyes... I'll have to admit, when I started this, I was concerned I might learn things which cast Summers in a more favorable light, making the blog pointless or even harmful. That has not been the case...

Saturday, February 7, 2009

Mankiw's Folly

Greg Mankiw was just tickled to death today after apparently catching Paul Krugman in a falsehood, when Krugman wrote:
We’re already closer to outright deflation than at any point since the Great Depression. In particular, the private sector is experiencing widespread wage cuts for the first time since the 1930s.

Mankiw then instructs his readers to look at the BLS report:
In January, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls rose by 5 cents, or 0.3 percent, seasonally adjusted. This followed gains of 7 cents in December and 6 cents in November. Over the past 12 months, average hourly earnings increased by 3.9 percent.

This is one of those times, however, when it helps to not be an imbecile.

First, why in the world does Mankiw care about the year-on-year total? Doesn't he realize that everything before September is ancient history? Yes, nominal wages rose quickly before September, but not since. From January to July of last year, the CPI-W rose about 4.0%, since then it's deflated by an alarming 4.5%, and so Mankiw takes comfort by the increase in the real wage of what, 1-2%? That gives us nominal wage deflation of about 3% for past three months... All the meager gain in the real wage tells me is that, yes, nominal wages are sticky. I signed my employment contract last year -- and my employer can't change it. Since prices have fallen, my real wage has increased, even though my employer is bleeding cash and will almost certainly try to renegotiate after this year...

Second, Mankiw doesn't get the difference between real and nominal. Krugman was arguing for nominal wage cuts, while the BLS is saying that real wages -- deflated with the CPI-W, which fell by .9% -- rose by .3%, which means that nominal wages did fall by .6% in one month. Extrapolated for the year, that's a dive of 7.2% per annum. It's an embarrassment for all economists that a top tenured macro-economist at Harvard can make such an elementary mistake.

Another issue is that I could not find whether the BLS compares the same workers when they do their average wage, or whether they take the average among all workers who work (which I suspect is more likely). In January, 600,000 workers lost their jobs, including 76,000 jobs lost in the "temporary help" industry. What do you bet that those in the "temporary help" industry do not make as much as workers on average? Even within industries, when times are tough I suspect you're more likely to lay off the new, inexperienced staff who help the business least. Since these people have the smallest salaries, firing them will raise average wages, regardless of what happens to everyone else. I suspect the average wage that the BLS provides is among all workers, which does not actually tell us much. If so, then even the real wage has likely fallen off a cliff the past three months...

I can't wait until Krugman responds...

(Update: OK, well Krugman never responded, and it appears that Mankiw's number
nominal. I got my data from the Bureau of Labor Statistics website though, here: which gives the total change in "current dollars" as .3%, with a footnote at the bottom which says "The Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) is used to deflate this series. -- a footnote, which i now see was meant to apply to the line below it... the "current dollars" is also confusing... they should just write "nominal values" to avoid confusion... I still maintain looking at the year-on-year change is not informative, and that the change was likely do to low wage employees being laid off...)

(UpdateII: Krugman responded. The BLS's employment cost index is supposed to control for the fact that low-wage workers get laid off first. The issue, is that they only publish quarterly series. However, in downturns they are a bit lower than the hourly earnings figures... In the 4th quarter of last year, the BLS's employment hourly cost index increased by .5%, while it increased .88% for nominal wages. If the same spread held for January, then we would, indeed, have wage deflation of .08%...)

Friday, February 6, 2009

Summers says some smart things...

Yesterday, he acknowledged "deflation a real threat", and "This bill is imperative for our economic security". OK, but then he also said the stimulus package is aimed at helping fill a $2 trillion gap between the economy’s potential growth and its actual performance in 2009 and 2010. OK, but the stimulus bill is now less than $800 billion. How is it going to fill a $2 trillion gap? With real interest rates rising? It's going to be like pissing into the ocean. The sea level just isn't going rise. We need something big... Why does it seem like, in two years, a bunch of conservatives are going to say "See! Fiscal stimulus doesn't work!" Of course, why should an $800 billion fiscal stimulus bill work when we've got a $2 trillion output gap? When much of that $800 billion dollar stimulus is merely offsetting state cuts?

The NYT turns into ridiculoustown

Will over at the Ambrosini Critique quotes the Gray Lady:

Among ordinary Japanese, the spending is widely disparaged for having turned the nation into a public-works-based welfare state and making regional economies dependent on Tokyo for jobs.


Will then asks, is it true?

The short answer is yes. And, yet, the New York Times is profoundly wrong to warn us that "Japan's Big-Works Stimulus is Lesson". They tell us how much Japan spent since 1991 on infrastructure, but what they do not tell us is how much Japan spent on infrastructure in the 1970s and 1980s. Japan didn't so much as turn to Keynesian infrastructure spending as the economy melted as they did just continue on autopilot on the same utterly wasteful rural infrastructure projects they'd always done. When the economy was growing at 8% a year, they could increase infrastructure by 8%. Once their economy was growing at -1.5%, they could not continue fast infrastructure growth. If anything, spending growth on infrastructure in Japan actually slowed in the 1990s, and total spending decreased after 1995! Japan's debt increased after 1990 due to slowing tax revenue, not b/c of spending increases. It's important to remember than up until the end of the 1980s, Japan had been growing like wildfire. What put an end to that was the 1985 Plaza Accords, which resulted in an appreciation of the Yen.

Hence, Japan, year on year, spends something like 40 times as much as America per square inch of territory on roads, tetrapods, and just flat out dumping concrete across the countryside… in rural areas, construction is often the biggest employer… And a lot of these rural areas are rottonboroughs, places which are over-represented in the Diet, much like the US Senate, so these rural areas where nobody lives get huge amounts in construction. It’s been really contentious from an environmental standpoint, as environmentalists decry damming every river in japan at 14 places… It also sucks to go to what used to be a beautiful beach and find it loaded with ugly concrete tetrapods, and massive layers of concrete sea walls… There's one village in Kyushu which used to be famous for it's beautiful beach. Some local construction company won a contract to put in a sea wall and tetrapods, and then to build a museum on top of the sea wall with ... pictures of how beautiful the beach used to be before the sea wall and tetrapods were put on it! These rural construction projects are how the conservative LDP has managed to hold on to power for all but a few years since 1955... Actually, the Japanese system works like this: the bureaucrats run the country, and so the politicians don't interfere, the bureaucrats buy them off with the construction spending, much of which goes back to the LDP in the form of political donations and other kickbacks. Anytime a politician challenges the system, suddenly they'll be investigated for corruption... And since they've all taken money, they become easy to control...

The real lessons from Japan are fourfold: First, once you're in a deflationary trap, it looks like it can be difficult to get out of, so don't let deflation happen! So, what is not needed is to merely to slow the pace of infrastructure spending (while tax receipts are falling) and thereby run a huge deficit, waste billions on useless infrastructure, and do nothing about the deflation. What they needed was bold action at the beginning. Also, as a long-term development strategy, it makes no sense to tax cities in order to subsidize rural areas. Japan also spends billions on subsidies to agriculture, the other big industry in rural japan... It would be much better to just encourage people in the rural areas to move to cities, where there are higher wages. The 4th lesson is that policymakers should not allow a country to have deflation for half a decade. Why not? Well, the solution is actually quite simple: to get out of a liquidity trap, all you need to do, really, is print money. Kills two birds with one stone -- reduces debt, allows you to invest in public works at no cost, and it also reduces deflation, which, after all, is the goal. In normal times, you don't want to print money because it debauches the currency. Now, that's the whole goal. A third plus is that it should also reduce the value of the currency, making your exporters more competitive. In Japan a 4th plus was that it's banks held lots of dollar-denominated assets but yen-denominated liabilities, meaning that any yen devaluation would actually have improved banks' balance sheets... Another thing is that Japan's schools aren't even that nice -- certainly not as nice as schools in Korea. Japan's infrastructure spending was ineffective, in part, b/c it was corrupt and b/c it subsidized inefficient rural areas.

As I see it, Japan did not do that (or rather, waited way to long to do that) because of overly cautious policy, and perhaps a few conservative policy makers confusing 'strong yen' with 'strong country'. I actually wrote my undergraduate thesis on this... I forget all of my conclusions now, but I do remember quipping that, 100 years ago, Japanese rallied around the phrase 'strong army, strong country', but that Japan's strong army actually is what led to its downfall. In the 1990s, it was Japan's strong yen that did it... Part of the difficulty probably stemmed from the fact that once deflationary expectations set in, it's difficult to undo them. Wasteful public works spending definitely predated the 1990s collapse, however... If anything, due to public outrage, it has gotten better over time.

As far as I've seen, a disproportionate amount of the US stimulus will go to places like Montana and South Dakota, each of which have two senators, and more urban states, like California, which has about 50 times as many people as South Dakota, will get shafted on a stimulus-to-GDP ratio. The Fed is not printing money, of course, it's just creating it -- poof -- out of thin air. Some $2 trillion already. And it's been buying assets other than US Treasuries. So the stimulus, at $300 billion for the next 12 months or so, is tiny in comparison. Let's hope it's all enough...

Thursday, February 5, 2009

The Decline and Fall of 'liberal' CNN

Just got injured in an indoor soccer game. As I was resting on my recliner, I did a horrible thing. I turned on CNN. What did it tell me? One talking head asked another if Obama and the Democrats were "really" being bipartisan. The answer? No! The evidence? Not a single Republican in the House voted for the stimulus package...

Let's review the facts there... A couple months ago, before the Obama team announced its stimulus plan, when Paul Krugman was pushing a bill about $600-700 billion in new spending in the first year alone, conservative economist Martin Feldstein, who advised Reagan, published an Op-Ed calling for a $400 billion stimulus plan this year and the same amount for next, with a mixture of tax cuts and new spending (though he wanted lots of new military spending). Now, except for the focus on military spending, that's exactly what Obama's plan is! Liberal economist Joseph Stiglitz wanted no tax cuts... So, conservatives got about 85% of what they wanted, before the plan was announced, liberal economists basically just got the shaft. Not only do we think it is too small, but too heavily weighted toward tax cuts. What happened after the plan was announced, of course, was that the goal posts shifted. House Republicans realized it was in their political interests to just oppose whatever bill came out. Why was it in their interests to do so? Because then the press coverage would be that Obama's stimulus bill is not bi-partisan. And so, if those risky tax cuts don't work, Democrat's will own it. Obama made, in my opinion, waaaay too many concessions, and what did he get for it? A worse stimulus bill and the label 'partisan'.

Except, of course, these weren't really concessions, the tax cuts were what Larry Summers thinks is prudent policy... Just happened to be pretty much the same thing that Martin Feldstein thinks is good policy...

Summers Wikipedia Entry

As of yet, we at Economists for Firing Larry Summers have done very little to bring our goal to fruition. One thing we have done is update Larry Summers' wikipedia page.

Check it out:

We're hoping we can get at least an Op-Ed published, if not a longer Summers' profile in one of the liberal mags that Obama himself might actually pick up and read-- Atlantic Monthly, the New Yorker, New York Times magazine, or TNR... Good thing we have a President who actually a) reads news, and b) knows how to use the Internet!

Biden vs. Summers?

Check this out!

Hopefully Solis gets her post, so Solis-Bernstein-Biden can be a counterweight to Summers... The early rounds have all gone to Summers, but thank the lord there are others in the administration!

Deep Thought

The talk these days is all about who Larry is bringing on to advise him. I wonder if Larry Summers will bring in Paul Wolfowitz, regime changer extraordinaire, like he did when he was at Treasury, to advise him on 'regime change' for foreign countries?

FYI, Larry Summers brought Wolfowitz on board back during the Asian financial crisis to advise Treasury on implementing 'regime change' in Indonesia. How did they do it? They forced fuel price hikes, cuts in government services, and other boilerplate IMF fiscal austerity policies on Indonesia, sparking riots. In the ensuing flames, hundreds of people actually burned to death in Jakarta...

Now that we've got Summers back in power, all we need is wolfie.

Bring back the Wolf!

Pay Restrictions 'a joke'

Executives at Goldman Sachs Group Inc., JPMorgan Chase & Co. and hundreds of financial institutions receiving federal aid aren’t likely to be affected by pay restrictions announced yesterday by President Barack Obama.

The rules, created in response to growing public anger about the record bonuses the financial industry doled out last year, will apply only to top executives at companies that need “exceptional” assistance in the future. The limits aren’t retroactive, meaning firms that have already taken government money won’t be subject to the restrictions unless they have to come back for more.

Another depressing sign. Personally, I would use the outrage over Wall Street pay to enact new legislation affecting all executive compensation. This would include more heavily taxing stock options, and creating a new tax bracket, of, say, $600,000, and increasing the top tax bracket from 35% to 49%... Of course, this would raise a lot of revenue, so I would then also cut taxes for people who make less than $60,000...

I think this method is much preferred to the government saying, only in a few select firms that get large bailouts "you can't make over $500,000". Top people in those firms will just leave to go make millions at other firms, after all...

You Read It Here First!

Joshua Micah Marshall of Talking Points Memo Channels Economists for Firing Summers...

he writes:

"I'm starting to get the sense that Larry Summers is to economic policy in the Obama Administration what Dick Cheney was to national security policy in the Bush Administration."

Starting? Faithful readers of "Economists for Firing Larry Summers" have known this for literally weeks now... The thing is that Dick Cheney's tentacles did not just go into national security policy, they just as potently influenced everything else. Remember Harriet Miers please? Nevertheless, it is heartening to finally see some main bloggers start to come to grips with the Summersization of the Obama administration, and what it means. So far the whole issue has been nearly ignored, and Summers has gotten a free pass. We need him to be ensnarled in the teeth that is the liberal blogosphere...

Here's part of the article tpm cites:

Paul Volcker has grown increasingly frustrated over delays in setting up the economic advisory group President Barack Obama picked the former Federal Reserve chairman to lead, people familiar with the matter said.

Volcker, 81, blames Obama’s National Economic Council Director Lawrence Summers for slowing down the effort to organize the panel of outside advisers, the people said. Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said.

This is pretty much par for the course for Larry Summers...

Wednesday, February 4, 2009

PPI Trade Facts of the Week:

The Numbers:

Value of "fiscal stimulus" packages worldwide:

United States: $825 billion
China: $586 billion
Japan: $250 billion
Germany: $80 billion
Spain: $50 billion
France: $35 billion
United Kingdom: $30 billion
Canada: $45 billion
India: $20 billion
Australia: $20 billion
Korea: $11 billion
Brazil: $5 billion
Thailand: $3 billion
Singapore: $3 billion
Chile: $3 billion

I posted earlier on this; what I had read suggested China's actual stimulus was closer to $1.5 trillion, but it could all be a mirage, including spending already counted, etc. Still, though, China announced it would bring back universal health care. Can't help the feeling that China is using the crisis to move forward, and we are not... The other point worth making is that b/c of the crisis, and the ensuing flight to quality, the US has a freer hand to have a big stimulus than smaller countries do, although the Eurozone's stimulus package is pathetic. (And, last I saw, they still had some inflation and non-zero interest rates... I suspect that won't hold up for long.)

Hoisted from the comments!

Anonymous guy I met in Puno responds to my post "Stimulus, What Stimulus":

Well said.
But maybe you should be concerned that Kevin "Dow 30,000" Hassett at the AEI agrees with you about funding through the states? I guess even he could be right sometimes:

CNN says that the state budget shortfalls are about $90 billion total, which seems lower than your $200 billion estimate. It's not clear at how they arrive at that figure, nor how they decide how much individual states receive (and in what form). They also raise an interesting point - given fungibility, how do we assess the contribution to state finances (in terms of preventing layoffs) from giving money directly to states and from giving money to specific programs that could alleviate pressure on state budgets?

Anyway, I love the new blog and plan to check in often. I'm even learning new things like the unholy alliance of Larry Summers and Laura Ingraham.

To which I can only say, Lol, yes, it is troubling that I agree with Kevin "Dow-36,000" Hassett. Certainly, I suspect many small states may likely get more money than they can spend, but, on the other hand, the linked article says that California will get about $63 billion over two years (this is definitely more than I'd read previously, and certainly a good sign), with a budget shortfall estimated at $42 billion over the next 17 months, so it does seem like it should get states out of the woods. My main argument is that the state and local budget shortfalls make the real size of the stimulus much, much smaller than it looks.

According to this site (which I've linked to before), state budget shortfalls the next three years, the duration of the stimulus, is around $350 billion, and this does not count local shortfalls, like in Chicago which has a $4 billion infrastructure budget shortfall, or in New York City, where the government is reported to be planning laying off 23,000 and has raised Metro fairs, or in Philadelphia, where they are expecting a $1 billion deficit over the next five years. It also already factors in tax hikes and budget cuts that have already been made -- state government spending actually fell .5% last quarter, after increasing by 1.3% the quarter before, so this is substantial. (The $90 billion shortfall is the state budget shortfall for this fiscal year alone...)

Mankiw linked an article yesterday suggesting that money earmarked for upgrading inner-city Milwaukee schools is likely to be largely a waste. The question is, however, would this money be wasted more than if we just sent checks to people for doing nothing (Mankiw's bright idea)?

Anyway, the way I see it is that, at a bare minimum, state and local spending should not be cut. On top of that, I back huge investments in state and local spending, increasing salaries for teachers, using this opportunity to expand health care, etc... And using the public backlash against Wall Street bonus's to go after all executive pay, not just for those who get government money. (Although today's announcement capping exec pay was definitely heartening!)

Tuesday, February 3, 2009

Larry Summers -- the new Dick Cheney

I just finished Paul Blustein's excellent book "The Chastening" -- about the Asian financial crisis -- last night. First thought: Great read. Should be required reading for all Econ Ph.D's. I give the book high marks even though the case studies were not as well-developed as I would have liked (I need more graphs and statistics!), and some of his analysis was second-rate. Grown men should not be fooled by the old "moral hazard" argument -- the argument that the government should not bail out countries b/c then private agents haven't recouped the necessary losses. In the book, Blustein argues that one major negative result of the Korea bailout was moral hazard in Russia, where the government was paying 100% interest on loans maturing in 6 weeks. That indicates to me that the market had priced in a likely default, it does not indicate to me that the market was stricken by moral hazard. Nevertheless, the book was well worth a read.

There were several interesting things about Larry Summers in the book as well. The first thing that suprised me was how much power he was able to accumulate in the Clinton administration, particularly in foreign policy and in usurping the IMF. It looks like he was able to just steamroll everyone. He's a solid manipulator. He's great at convincing people he's the smartest guy in the room. And he gets his way. He comes across as a very shrewd bureaucratic operator. And someone who is not afraid to delve into policymaking outside his area of expertise: e.g., when he pushed for regime change in Indonesia. And yet, even though the IMF has gotten hell for what it did (or didn't do) in Asia, Russia, Argentina, and Brazil, somehow Summers has gotten off scott-free. It's really something when you think about it.

The second interesting point is that Larry Summers really just comes across as a typical free-market conservative. It comes out very clear in the book that he thinks that government should involve itself in financial markets as little as possible. This is something that Paul Blustein second-guesses him on time and again... See my early post on Summers in the Korea crisis. I can't help but feel driven toward the conclusion that this ideological bias in Summers is part of what is driving him now to advise Obama not to nationalize the banks. In China, right now, bank lending is up, b/c the government is just telling banks they have to lend. In the US, on the contrary, bank lending has dropped sharply, even at banks who are getting billions in TARP money. But, why, if these banks need TARP money, should the gov't not also make them loan it out? Hard not to blame Summers' ideology here...

Also, there was a Summer's article in the WSJ yesterday. Of course it's not on-line, but the gist of the article is that Summers is not only bringing in some heavy hitters, but he's lined his staff w/ people who have close working relationships with Obama. So, it really looks as though he's consolidating power. Add this observation to the reality that every policy decision out of the Obama White House seems to have Summers fingerprints on it, and it really looks like Larry Summers is the Dick Cheney of the Obama White House.

All of this portends a very ill wind...

Sunday, February 1, 2009

Larry Summers' Enron Problem

This is just one of those throwback posts, where the Economists for Firing Larry Summers take a look at another of the fateful and misguided decisions Summers has made...

Alex Gibney writes:

"The supporting role that Summers played in Enron, including his reassuring correspondence with Ken Lay and his laissez-faire approach to the California energy crisis of 2000 and 2001, indicates why he may not be suited to steer the nation through the troubled economic waters that lie ahead.

In his book about Enron, Conspiracy of Fools, Kurt Eichenwald describes Summers’ role in the early stages of the California energy crisis when the state was suddenly faced with power shortages and energy costs that were soaring up to 20 times normal levels. Then-Governor Gray Davis, convinced that Enron and others were manipulating the market, begged the federal government to intervene."

So what did Summers do?

"Even as blackouts shut down dialysis machines and traffic lights from Sacramento to San Diego, Summers and the Federal Reserve chairman, Alan Greenspan, decided to take a few moments to teach the California governor a lesson or two about free markets. In an emergency meeting the day after Christmas 2000, Summers and Greenspan, responding to the governor’s complaints about corporate tampering, lectured the governor that price manipulation was only possible because California had improperly regulated its markets. They urged the governor to take it easy on Enron and the other power companies because, in effect, being too critical of them might make them reluctant to do business in California. Summers and Greenspan pressured the governor to remove state caps on consumer rates.

A second meeting took place a few weeks later, via video teleconference, with Summers, California’s governor, and energy providers—including Enron’s Ken Lay. This time, Summers not only called for consumer rate increases, he also urged the governor to reassure the markets by relaxing environmental controls (Ken Lay’s suggestion) so that more power plants could be built quickly.

Once again, the California governor protested, refusing to raise electricity rates for consumers, declining to eviscerate environmental controls, and instead requested federal price caps on the electricity that power companies sold to California. Remarkably, Summers defended the energy executives, including Ken Lay, as doing “a pretty good job” of serving California, and dismissed the possibility that they were colluding to drive prices up—even though, as we know now, that’s precisely what they were doing, Summers disparaged the governor’s plan; it wouldn’t work because such government intervention would inevitably “distort the market,” he said.

Neither side gave in. Seven days later, George W. Bush was inaugurated as president. At the time, Ken Lay himself was widely discussed as a possible treasury secretary. Blackouts increased throughout California and energy prices continued to soar until, finally, in the spring of 2001, federal regulators imposed price caps on not just California but on all of the western states.

To be fair to Larry Summers, as of early 2001 neither he, nor anyone else outside of Enron, had heard the now-famous audiotapes of Enron traders cackling with glee as blackouts crippled the state and cost Californians $40 billion. Summers also didn’t know then about the traders’ plans, with names like “Deathstar” and “Get Shorty,” which gamed the market by shutting down plants and shipping electricity out of the state to drive up prices. And to be sure, some of California’s pre-existing energy regulations were indeed a little wacky and unbalanced."

Not to attack Gibney, but, as Krugman writes, it was obvious to other economists at the time that market manipulation was the true culprit.

Aren't you glad this guy, who got suckered in by Kenneth Lay, is Obama's chief economic adviser?

Did Larry Back the Iraq War?

I don't actually know, but this Harvard Crimson article suggests that it is more than a distinct possibility. One of the attendees remembered of those who attended that “they largely believed that Saddam Hussein did in fact have weapons of mass destruction; and that the invasion would probably succeed in its immediate goals.” Now, it just so happens that Larry and I were in the same place, acting on roughly the same information. I remember when, back in 2002, Christopher Hitchens came to the Harvard Kennedy School to debate Father Hehir, (I'm pretty sure Summers did not attend), but I certainly felt at the time that it was clear that we had little evidence that Saddam had any of the really harmful WMDs. Why did I think that? Because the White House kept announcing that it had a smoking gun, and whenever it was asked about it, it said either that it "is releasing it" or that it "had released it" or that it would "release it soon". Of course, they never released anything but crap. Yeah, I thought Iraq might have had a little mustard gas or something, but for me, that was the tell that Saddam more than likely did not have weapons that would justify a war, such as a nuclear weapons program...

Then, once, when being interviewed on Charlie Rose with Henry Kissenger, back in 2004, Rose asked Summers what America had to do to repair its damaged relations with Europe. Summers replied that it wasn't just what America had to do, the question was what Europe needed to do to repair its relationship with the US! For me, that's the tell. Larry thought Europe was wrong about Iraq, and so it was they who needed to woo us.